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«Naked Forex High-Probability Techniques for Trading without Indicators» by Alex Nekritin and Walter Peters

The book «Naked Forex High-Probability Techniques for Trading without Indicators» presents the world's oldest trading style, which is trading naked charts without adding any technical indicator. Traders using naked charts start by determining major support and resistance and later focus on the price action near these levels.

These are some strong points made in the book:

 

Essential Steps for Successful Trading

 

These are the five steps:

(1) First comes the chart analysis

As briefly explained later in the article, the trader starts by analyzing several charts to identify a few trading opportunities.

(2) Second comes the planning

After identifying some opportunities, the trader enters the market by placing pending orders at predefined prices. Additionally, he places take-profit and stop-loss orders for every position.

(3) The third step is managing the trades

The next step is about managing the trades. This involves reacting to the market data that comes back via the price action on the chart. Some adjustments may be needed to the initial trade setups during this stage.

(4) The fourth step is exiting the market

According to the authors, this is the most important step. You make money only when you exit your positions, not before

(5) The fifth step is the learning curve

The successful trader examines and evaluates every trade from the beginning to the end. This examination is helpful in understanding what went well and what went wrong but also to learn from any mistakes.

 

 

Introducing the Naked Forex Strategy

 

After mastering naked-chart strategies, traders find it difficult to return to indicator-based strategies. This is because naked-chart strategies remove the lag time inherent in indicator-based trading.

 

Parts of Naked-Trading Strategies

All of the naked-trading strategies have three common parts:

(a) The first is to identify major support and resistance zones on the chart

(b) The second is to wait for the market to reach one of these two zones (S&R)

(c) The third part is to enter a trade once a ‘catalyst’ prints on one of these two price zones

 

Chart: Trading Naked on a BTC Line Chart

 

Price Zones Speak the Truth About Changes in the Market Sentiment

Support and resistance zones create a sweet spot on the chart.

 

Focusing on “Market Scars”

A major focus of the naked-trading strategy is the identification of support and resistance levels. By combining these levels, you get two zones:

(i) one of major support below the current price, and one

(ii) of major resistance, above the current price

These two price zones speak the naked truth about market sentiment. If the price breaks through one of two zones, it is a powerful signal that the market sentiment is changing. The authors call these levels of price action “market scars”. This is because markets have memory as traders do.

 

Important Characteristics for Understanding Price Zones

These are some important characteristics for understanding and recognizing major zones of support and resistance:

1. Zones are areas, not specific price points
2. Zones are where naked traders find trading opportunities
3. Zones are like fine wine; they get better with age
4. Zones are spots on the chart where price reverses, repeatedly
5. Zones may be extreme highs or lows on the chart
6. Support and resistance zones rarely need to be modified

 

The Market Price is your “Biofeedback Machine”

 

The market price should be seen as a “Biofeedback Machine”. If the market is going in the wrong direction that initially anticipated, it should be seen as valuable feedback that you should learn from it. These are the questions that need to be answered:

□ Was the entry too early?

□ Was the entry too late?

The market will tell you how to evaluate your trades. You can learn more from this “Market Biofeedback” than from any guru, any book, or any trading course. After you enter a trade, paying close attention to how the market behaves is the best learning tool available to you.

 

“Market Biofeedback” involves two distinct parts:

(i) How the market behaves after you enter your trade, and

(ii) How do you react to the price action (how you do respond to a drawdown or a massive market move?)

Both parts of the biofeedback equation are essential to get a clear picture of what you are learning from your trading experiences. The easiest way to take advantage of this “Market Biofeedback” is by recording your thoughts as you trade. Alternatively, you can record your voice before, during, and after a trade. Or you can take screenshots of the trade or record video by using a desktop computer recording software.

 

These are some important questions that need to be answered all the time:

• What was the market action since you entered a trade?
• By looking at the market now, would you take the same trade?
• How do you feel about your trade?
• What do you like and dislike about this trade now?
• On a scale of 1 to 10, where would you rank this trade now?
• If you were not in a trade now, would you take the opposite trade?

 

 

Price Patterns on the Naked Chart That Matter the Most

According to the authors, these are some important patterns for traders implementing naked-chart strategies:

 

(1) The Big Shadow (Engulfing Candlestick Pattern)

 

Big shadow patterns are two-candlestick formations similar to the engulfing candlestick pattern.

• Big shadows must print on the zones (at extreme highs or extreme lows)
• The big-shadow candlestick has a higher high and a lower low than the previous candlestick
• The second candlestick of the formation is the big-shadow candlestick
• Bearish big-shadow candlesticks have a closing price near the low
• Bullish big-shadow candlesticks have a closing price near the high
• Big-shadow candlesticks have wider ranges than the nearby candlesticks

 

Trading the Big Shadow

• For bullish big shadows, the stop loss is placed a few pips below the low of the big-shadow candlestick
• For bullish big shadows, the candlestick following the bullish big shadow triggers the buy-stop order placed above the high of the big-shadow candlestick
• For bearish big shadows, the stop loss is placed a few pips above the high of the big-shadow candlestick
• For bearish big shadows, the candlestick following the bearish big shadow triggers the sell-stop order placed below the low of the big shadow candlestick

 

(2) Wammies and Moolahs (Double Tops/Bottoms)

Wammies and Moolahs are similar to Double Tops/Bottoms chart patterns:

 

Wammies Characteristics (Double Bottom)

These are the seven important characteristics of the wammie pattern:

1. The market touches the support zone twice
2. The second touch is higher than the first touch
3. There are at least six candlesticks between touches
4. The market prints a bullish candlestick on the second touch
5. The trade is entered with a buy stop a few pips above the bullish candlestick
6. The stop loss is placed a few pips below the first (lower) touch
7. The profit target is the next zone above the wammie

 

Moolahs Characteristics (Double Top)

These are the seven important characteristics of the moolah pattern:

1. The market touches the resistance zone twice
2. The second touch is lower than the first touch
3. There are at least six candlesticks between touches
4. The market prints a bearish candlestick after the second touch
5. The trade is entered with a sell stop a few pips below the bearish candlestick
6. The stop loss is placed a few pips above the first (higher) touch
7. The profit target is the next zone below the moolah

 

Tips when trading both

• Choose the set-ups with many candlesticks between touches. Six candlesticks between touches are nice to see, but 20 candlesticks between touches are even better
• Take trades with catalysts on the second touch. If the second touch is a big shadow or a kangaroo tail, the odds are probably strongly in your favor
• Pick trades that have a second touch much further from the zone
• Only choose wammies and moolahs that are in strong, well-defined zones. If the zone is not an important one, then the market may only trade away from the zone briefly before breaking beyond the zone
• Find set-ups that have very few zones nearby. This will enable you to place a profit target very far from the entry price and maximize profits
• Trade those wammies and moolahs that have “room to the left”

 

(3) Bullish & Bearish Kangaroo Tails (Hammer & Doji patterns)

Bullish & Bearish Kangaroo Tails are similar to Hammer and Doji patterns.

 

Kangaroo Tails Characteristics:

• Kangaroo tails should have long tails
• Ideally, the kangaroo tails print at an area on the chart that has not seen price action in a long time
• Bullish kangaroo tails should have a closing price that is higher than the opening price
• Bearish kangaroo tails should have a closing price that is lower than the opening price
• The candlestick after the bullish kangaroo tail should trade higher than the high of the kangaroo tail
• The candlestick after the bearish kangaroo tail should trade lower than the low of the kangaroo tail
• Kangaroo tails should have a greater range than the previous 10 candlesticks

 

Red Flags:

• Kangaroo tails with very short tails
• Kangaroo tails that do not print on a zone; are not valid
• Kangaroo tails are preceded by giant candlesticks -This suggests that the trend may continue, and the kangaroo tail may only be paused
• When the range of the previous candlestick does not contain the open and the close of the kangaroo tails

 

 

The Retail Forex Market and the Zero-Sum Game

 

Most traders participate in the retail Forex market which is different than the real $4 trillion global Forex market. In essence, there are two markets:

(a) The interbank market, where banks, governments, and large corporations exchange currencies (one for another)

(b) The retail market, an entirely different market or else a “zero-sum” game

 

The Zero-Sum Game

In retail Forex, when you make money some other traders lose, and so does your broker. Most retail forex traders do not make money. In fact, your forex broker will assume that you are going to lose money in the long run, since the large majority of forex traders lose money.

 

Forex brokers divide all traders into two groups

Forex brokers divide all traders into two groups.

(i) There are the winners, Forex traders who make money, and

(ii) The losers, Forex traders who lose money

Retail brokers believe that all new customers are unlikely to make money, so all new accounts are placed into the loser group. After several months of consistently profitable Forex trading a trader may be placed into the winner group. Your retail forex broker will begin to hedge your trades. In other words, if you are in the winner group, your retail forex broker will take trades in the real Forex market, the interbank market, to offset the profits accumulated by the winner group.

 

■ Alex Nekritin and Walter Peters in «Naked Forex High-Probability Techniques for Trading without Indicators»

G.P. for CarryTrader.com (c)

28th of October 2024

 

Book Source: Naked Forex: High-Probability Techniques for Trading Without Indicators